Today I want to talk with you about Economic Bubbles:how to correctly interpret them and when it is a right moment to buy. Will consider the main phases of such market and the differences between them.
Strange though this might sound, the BTC chart is ideal for considering these cases. We will start from the April 2017 when the Bitcoin’s price reached $1000 - $1600 points. At that moment, the market was in a hidden phase and there were only smart people who entered the market, as they knew that the asset had good prospects for a growth. This phase can also be called as a “Change”.
This phase can also be called the phase of change. This phase is distinguished by some sort of specific information surge, discovery or a kind of innovation. In any case, this is a global change in a particular sector of the economy, as a result of which market participants begin to regard this sector as beneficial for investments. On the Bitcoin market, these were the times when cryptocurrencies were only gaining momentum and then smart money were being attracted by the fact that currencies could be backed up not only with gold and oil , shares of some companies, but also, so to speak, by codes defined by the limited combinations of characters in the code. And so the first strong money began to come to Bitcoin .
This is followed by an awareness phase that attracts institutional money utilizing its growing popularity. After the shift prices begin to grow gradually. This is not a speculative growth, since growth is most often determined by the improvement of high quality in a certain area of the economy, in our case - the field of cryptocurrency. And knowing that other crypto-assets can be acquired for BTC , BTC grows first. But, as prices rise, more market players pay attention to this, which leads to the next growth phase, discussed by us.
The rise of prices is not a sufficient condition for the emergence of a bubble. For any financial tremble fuel is needed. Without it speculations on a larger scale are impossible. The lack of accessibility does not allow new members to connect to the sector.
Accessibility becomes the entry ticket for everyone wishing to enter the game. For example, a steady increase of the BTC price was predicted, a person can simply invest all of one's free money in a given currency and wait until the price doubles. But during this period, markets like Bitmex and Bitfinex are beginning to gain popularity, and this is trade with a shoulder to lean on which allows to purchase more than a person can afford. That was firstly; secondly, mining becomes more accessible. A person does not just buy and wait, but he also procures BTC. This is an opportunity to get more BTC than a person could afford if he simply bought currency with free money.
In turn, accessibility is the result of certain financial innovations, which are often developed specifically for new market conditions.
As a result of availability, the market begins to warm up. Trade in debt stimulates the growth of sales, and here the shortage of the subject of sales begins to affect the market. Prices are growing faster, resulting in fertile ground for quick profits. With the connection of an increasing number of new players, prices are completely out of control. Any long-term forecasting becomes impossible. Rising prices provoke all stupid, greedy, and desperate to connect to the game. As fire constantly requires fuel, so the bubble constantly needs an influx of new victims.
Then the bubble enters its most dramatic phase. This phase can be called the phase of Mania. Some sober analysts say that the process cannot continue like this. They present arguments based on experience, long-term research and logic. But the arguments of a few sensible people are lost due to the fact that prices continue to rise. Skeptics are destroyed by the arguments of charlatans, who preach that the world has changed, and that in the new world there must be new prices.
The world, of course, is changing daily, but this does not mean that prices should be out of control. But another day passes, and the charlatans once again benefit. During this period, they launch their most cruel lies into society — when prices reach their new long-term level, their growth will smoothly stop. The idea of a smooth stop is reassuring, and many contributors which were attracted from the outside find themselves in a trap. Of course, they realize that prices cannot rise forever, however they choose to act on the basis of such an outcome. For a while everything goes without a hint of tragedy. Those who have not entered the game face a terrible dilemma. On the one hand, they understand all the risks, but on the other hand they realize that they might miss a fantastic opportunity. Every day they hear incredible success stories from their friends and acquaintances, and not many manage to resist the temptation. The rest jump into the pool and eventually go bankrupt.
Every person prefers the belief in the best outcome, and the bubble cynically uses it. He demands unconditional faith from his victims, and it is faith that he feeds on. But while the euphoria involves more and more new participants, regular market players who have been doing business in this industry for a long time are becoming aware of how unreliable this creation actually is. They lose their faith and begin to quietly panic. In the end, they decide to withdraw their money. Usually, the old players in this market try to stay unnoticed whilst they plot their escape, and most often they do succeed. But regardless of whether random participants notice the departure of the main participants or not - the withdrawal of money by regular participants is the beginning of the end.
The causes of the explosion can be different, but sooner or later the bubble pops. Sometimes widespread panic, which spread from old players to the new ones, can be the detonator. Sometimes it takes the form of a change in credit policy, or even new information. But euphoria is always replaced by panic. Everyone suddenly realizes that the building is engulfed in flames and rush to the exit. Everyone is trying to sell, but there are no buyers. Panic is growing, prices are falling uncontrollably, credit money flows are drying up, and the counter of losses is finally turned on.
Strange though this might sound, the BTC chart is ideal for considering these cases. We will start from the April 2017 when the Bitcoin’s price reached $1000 - $1600 points. At that moment, the market was in a hidden phase and there were only smart people who entered the market, as they knew that the asset had good prospects for a growth. This phase can also be called as a “Change”.
This phase can also be called the phase of change. This phase is distinguished by some sort of specific information surge, discovery or a kind of innovation. In any case, this is a global change in a particular sector of the economy, as a result of which market participants begin to regard this sector as beneficial for investments. On the Bitcoin market, these were the times when cryptocurrencies were only gaining momentum and then smart money were being attracted by the fact that currencies could be backed up not only with gold and oil , shares of some companies, but also, so to speak, by codes defined by the limited combinations of characters in the code. And so the first strong money began to come to Bitcoin .
This is followed by an awareness phase that attracts institutional money utilizing its growing popularity. After the shift prices begin to grow gradually. This is not a speculative growth, since growth is most often determined by the improvement of high quality in a certain area of the economy, in our case - the field of cryptocurrency. And knowing that other crypto-assets can be acquired for BTC , BTC grows first. But, as prices rise, more market players pay attention to this, which leads to the next growth phase, discussed by us.
The rise of prices is not a sufficient condition for the emergence of a bubble. For any financial tremble fuel is needed. Without it speculations on a larger scale are impossible. The lack of accessibility does not allow new members to connect to the sector.
Accessibility becomes the entry ticket for everyone wishing to enter the game. For example, a steady increase of the BTC price was predicted, a person can simply invest all of one's free money in a given currency and wait until the price doubles. But during this period, markets like Bitmex and Bitfinex are beginning to gain popularity, and this is trade with a shoulder to lean on which allows to purchase more than a person can afford. That was firstly; secondly, mining becomes more accessible. A person does not just buy and wait, but he also procures BTC. This is an opportunity to get more BTC than a person could afford if he simply bought currency with free money.
In turn, accessibility is the result of certain financial innovations, which are often developed specifically for new market conditions.
As a result of availability, the market begins to warm up. Trade in debt stimulates the growth of sales, and here the shortage of the subject of sales begins to affect the market. Prices are growing faster, resulting in fertile ground for quick profits. With the connection of an increasing number of new players, prices are completely out of control. Any long-term forecasting becomes impossible. Rising prices provoke all stupid, greedy, and desperate to connect to the game. As fire constantly requires fuel, so the bubble constantly needs an influx of new victims.
Then the bubble enters its most dramatic phase. This phase can be called the phase of Mania. Some sober analysts say that the process cannot continue like this. They present arguments based on experience, long-term research and logic. But the arguments of a few sensible people are lost due to the fact that prices continue to rise. Skeptics are destroyed by the arguments of charlatans, who preach that the world has changed, and that in the new world there must be new prices.
The world, of course, is changing daily, but this does not mean that prices should be out of control. But another day passes, and the charlatans once again benefit. During this period, they launch their most cruel lies into society — when prices reach their new long-term level, their growth will smoothly stop. The idea of a smooth stop is reassuring, and many contributors which were attracted from the outside find themselves in a trap. Of course, they realize that prices cannot rise forever, however they choose to act on the basis of such an outcome. For a while everything goes without a hint of tragedy. Those who have not entered the game face a terrible dilemma. On the one hand, they understand all the risks, but on the other hand they realize that they might miss a fantastic opportunity. Every day they hear incredible success stories from their friends and acquaintances, and not many manage to resist the temptation. The rest jump into the pool and eventually go bankrupt.
Every person prefers the belief in the best outcome, and the bubble cynically uses it. He demands unconditional faith from his victims, and it is faith that he feeds on. But while the euphoria involves more and more new participants, regular market players who have been doing business in this industry for a long time are becoming aware of how unreliable this creation actually is. They lose their faith and begin to quietly panic. In the end, they decide to withdraw their money. Usually, the old players in this market try to stay unnoticed whilst they plot their escape, and most often they do succeed. But regardless of whether random participants notice the departure of the main participants or not - the withdrawal of money by regular participants is the beginning of the end.
The causes of the explosion can be different, but sooner or later the bubble pops. Sometimes widespread panic, which spread from old players to the new ones, can be the detonator. Sometimes it takes the form of a change in credit policy, or even new information. But euphoria is always replaced by panic. Everyone suddenly realizes that the building is engulfed in flames and rush to the exit. Everyone is trying to sell, but there are no buyers. Panic is growing, prices are falling uncontrollably, credit money flows are drying up, and the counter of losses is finally turned on.